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Buying an Investment Property

(An article from Equity Sep 2013 by Robert Drake)

Investing in property can be a good way to grow your assets. However, before you enter the property market it's important to do your research and check if this type of long-term investment suits your needs.

Pros and cons of property investment

Benefits:

  • Property can be less volatile than shares or other investments
  • You can earn rental income and benefit from capital growth (if your property increases in value over time)
  • If you take out a loan to purchase an investment property the interest on the loan is tax deductible
  • You are investing in something you can see and touch

Pitfalls:

  • Rental income does not usually cover your mortgage payments or other expenses, so you may have to use your regular income to cover these costs
  • A jump in interest rates will affect your return and decrease your disposable income
  • There may be periods of time where you don't have a tenant and will have to cover all costs yourself
  • You can't sell off a bedroom if you need to access some cash in a hurry
  • If the property market goes down so does your whole investment. There are many instances where people have ended up owing more than their investment property was worth
  • There are very high entry and exit costs

Where to buy

  • Buy in a high-growth area where there is potential for capital gains. Read the newspapers regularly to pinpoint the up- and -coming suburbs
  • Look for properties that will appeal to tenants - for example: properties with a view or close to shops, schools and transport
  • Research recent sale prices to give you an idea of what you can expect to pay for property in the same area
  • Find out about the rental vacancy rates in the neighbourhood. A high vacancy rate may indicate a less desirable area. This may make it harder for you to rent your property and may make it difficult to sell in the future
  • Think about changes in the suburb that will affect future prices. Things like planned developments or population changes can affect the future value of a property. Don't assume that last year's boom will continue forever.

What to buy

  • Look for properties with features that will appeal to as many people as possible, such as a second bathroom or lock up garage
  • Look for a property that will attract more than one segment of the rental market such as singles, couples, young families or retirees
  • Low maintenance costs are important. Units can be easier to maintain than houses, although you may need to pay body corporate fees

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